Protecting our best interests?

05 April 2011

New research from FairPensions and funded by the Nuffield Foundation calls for an ‘enlightened fiduciary' model for institutional investors to parallel the new duties of company directors introduced in 2006. The report argues that such a provision would provide a valuable ‘nudge' towards sustainable, long term investment to overcome narrow interpretations of fiduciary obligation which emphasise profit maximisation at the exclusion of all other factors, including financial system stability.

Speaking at the launch of FairPensions' new report, Ed Davey, Minister for Employment Relations, Consumer and Postal Affairs said:

"It's very important that fiduciary duties are fully understood by all those who exercise them.

"As a government, we do want to see ESG issues considered in a rounded way in order to encourage responsible investment decisions... Fiduciary duties placed on pension fund trustees can be about more than maximising the bottom line. These duties require pension fund trustees to consider the best interests of the scheme beneficiaries and we want everyone to understand that."

He went on to link the report to the government's current review of economic short-termism:

"The report speaks to a number of policy changes that the government are facing...Pensions savers should have a say in the management of their money."

According to the report, intense debates about corporate governance since the financial crisis have paid insufficient attention to the underlying savers whom fiduciary obligations exist to protect.

Christine Berry, author of the report, said:

"There's been a lot of talk about the relationship between asset managers and asset owners, but little about the ultimate beneficiaries. There is an urgent need to refocus debate onto the individuals whose money is at stake."

FairPensions, which campaigns for transparency and accountability in finance, argues that current interpretations of fiduciary obligation have lost sight of the core ‘duty of loyalty' to beneficiaries. The complex chains of financial intermediaries involved in today's pension investment have introduced widespread conflicts of interest which are inconsistent with a strict understanding of fiduciary obligation. The report calls on regulators to confirm that asset managers, investment consultants and insurance companies providing pension products are all fiduciaries by law.

Christine Berry went on to say:

"From 2000-2009, pension investment returns collapsed to 1.1% per year while funds' payments to intermediaries rose by more than 50%. Against this backdrop the industry needs to ask itself whether it is truly fulfilling its fiduciary obligations to beneficiaries. The current situation simply does not offer enough protection for savers from self-serving or reckless behaviour by their agents."

The report calls on the government to give savers more say in how their money is managed and to promote long term thinking in order to protect the savings of beneficiaries.

The research also highlights the part that investors played in the financial crisis of 2008. FairPensions points out that, unlike bankers, the people managing pension savings have emerged from the financial crisis with their reputations virtually unscathed despite evidence of their significant role in encouraging risky corporate behaviour in the build up to the crash.